AICPA proposes valuation framework for financial instruments

The accounting profession is looking to raise the bar again on valuations that underpin financial statement assertions with a proposed new framework for the valuation of financial instruments.

The American Institute of Certified Public Accountants is seeking comment on a new framework that would steer accountants and other finance professionals on valuing financial instruments and their underlying components. The framework is intended to bring some clarity, consistency, and transparency to valuations, especially for hard-to-value instruments like mortgage-backed securities, credit default swamps, complex bonds and other derivatives.

As financial instruments have grown increasingly complex over the past few decades, and as regulatory scrutiny over judgments and estimates has grown, determining values for financial instruments has become fraught with risk and uncertainty. The financial crisis of 2008 and 2009 drew the tension to a peak, leading regulators and valuation professionals to look for solutions emerging from that crisis.

“With this framework, the AICPA is responding to marketplace needs by creating a standardized and replicable process for financial professionals who perform valuations on financial instruments,” said Jeannette Koger, vice president of advisory services and credentialing at the AICPA, in a statement. “This framework will ensure that professionals working with financial instruments perform their engagements with independence, objectivity and consistency.”

The framework defines the level of documentation that professionals should produce and expect to demonstrate the valuation that’s been performed. The guidance relies on three key principles as the basis for effective and credible valuations — independence, objectivity, and consistency.

The AICPA is even developing another new credential, “certified in valuation of financial instruments,” for which the framework will serve as the basis. The new credential is expected to launch later in 2017. The intention of both the framework and the credential process is to assure that valuation and disclosure around financial instruments is done in a way that’s understandable, consistent, and transparent, the AICPA says.

The proposed framework establishes parameters around documentation requirements and establishes definitions of terms that may be unique to the framework. It also includes a list of accounting, audit, and valuation standards and references to technical literature to show how they are applicable to the guidance in the framework.